As I read personal finance book after personal finance book over the last year, I came to realize that a lot of concepts in various books were exactly the same. In fact, there were a handful that were mentioned in a majority of the books, which would indicate something close to a universal truth about personal finance management.
I went through the notes I collected on all of the books and tried to filter out the ten universal truths about personal finance shared by a large number of the books. Here’s what I found.
Spend less than you earn. This is the number one key, and it shows up again and again in almost every personal finance book that I read. You are never going to get ahead if you spend as much as you earn or more than you earn over any lengthy period of time.
Sit down with all of your accounts and figure out where you’re at. Every day you don’t have control over all of your accounts and can’t really estimate how bad the situation is is another day you’re going to be chained to your job and worried at night about it. Spend the time to sit down, spread everything out, and figure up your total financial picture. There are a lot of different ways to do this – I think that just listing every account you’re aware of (and the balance of that account) is the best way to get started.
Set small and big goals. Small goals are ones like commitments to not spend any extra money this week. Big ones are goals such as paying off all of your debts. State the goals clearly and effectively, and keep track of your progress towards these goals so that you’re constantly in the fold of something bigger than the minutiae of your day to day life.
Get a small emergency fund before you do anything else… The first step in any financial turnaround, once you’ve stopped spending more than you make, is to build up a small emergency fund so that you don’t have to put a minor crisis (like car issues, for example) on your credit card. $1,000 is a pretty common target number.
… then eliminate all of your high interest debt. After you have a small emergency fund, start dealing with your high interest debt immediately. There are differing opinions on how to do this, but the general consensus is you should start with either the highest interest debt (fastest route to recovery if you’re committed) or the smallest balance debt (provides success of some debt elimination the fastest).
Check your credit score regularly to make sure nothing bogus shows up. Go straight to annualcreditreport.com to get your report via the FTC. Don’t use other sources, like freecreditreport.com, which act as a middleman and tack on extra stuff for the same service.
Put at least 15% away for retirement (including what your employer matches). Some books say to put away 10%, but they often mention in the fine print that they’re not including employee matching in that number. Generally, to be on the safe side, you should be putting away at least 15% into your 401(k) and/or your Roth IRA.
Automate what you’re doing. If you’re investing, automate the investments and have a certain amount moved over from your checking each month. If you’re saving for a goal, automate transfers into your savings account. Automate as many of your bill payments as you can. The less you have to remember and encourage yourself to do, the better – plus, it takes extra effort to not do it once you’ve set it up.
Similarly, always look for ways to reduce your required spending each month/year. Any method you can find to reduce your monthly bills is incredibly worthwhile. Even simple things, like swapping your light bulbs for CFLs, buying EnergyStar appliances, and canceling some of the unused options on your cell phone plan and your cable plan, will really add up over time.
Invest extra money into low-cost broad-based index funds unless you have tons of time to do research. Almost a majority of the books indicated that this is by far the best way to invest. Just buy some Vanguard or Fidelity index funds and sit on them until you have a need for the money. Better yet, keep buying in regularly in an automatic fashion. If you have a ton of time for research and homework, you can make somewhat better money in individual stocks, but they’re riskier and require much more time investment.
These are the nutshell ideas behind many of the books I read, and these ideas usually pop up in some form in almost every single personal finance book. Why? They’re universal truths – or at least as close to truths as you’ll find in the world of personal finance.